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Daily analysis 11.01.2016

11 Jan 2016 13:43|Marcin Lipka

Good data from the USA quickly made place for anxieties regarding the Chinese economy's condition. The SNB about the rate of the Swiss franc. The rand lost approximately 10% at the opening of the currency market in the Republic of South Africa. The zloty remains under pressure. The Polish currency reserves are the lowest for almost 5 years.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

  • 18.40: Testimony of Dennis Lockhart from the Fed regarding the perspectives for the American economy.
  • 23.50: Testimony of Robert Kaplan from the Fed regarding the American economy and monetary policy.

China is again most significant

After very good data from the American market on Friday investors' sentiments improved only for a while. China still remain the market's main topic. Condition of the capital, as well as the currency market, is dependant from the information from this country.

First of all, it is worth noticing that the data from the USA were very good. The American economy created 292k new workplaces in non-agricultural sector. This exceeded the market's expectations by approximately 100k. Additionally, the data for the past two months was reviewed upwards by 50k. Thus, we can claim that there are 150k workplace more in the USA, than it was expected before the December's readings.

However, the situation regarding an increase in salaries looked slightly worse. It is currently the second most important data index from the Laboured Department followed by the markets. If it increases, inflation is more likely to rise. This on the other hand will give the argument for the Federal Reserve to make 4 hikes this year.

However, the hourly wage in the United States did not change in a month on month relation, and it was expected to increase by 0.2%. The third out of the most important positions in the American data – unemployment rate – remained on the 5.0% level as expected. On the other hand, professional participation index increased. This is a relation of people employed and who search for work, to people in working age. This may mean that the Americans who were not searching for a job, decided to return to the labour market. This is a good sign for the economy.

In general, this data should be considered positive, but the market's reaction was only temporary. For a moment the EUR/USD depreciated in the area of 1.0800, but at the end of the week it was in the area of 1.0900. Anxieties regarding China returned quite quickly. Also, the market concentrated on to slow increase in salaries, and ignored an increase in employment which is definitely more significant.

Monday's session in Asia was also not optimistic. The basic index of Shanghai's stock market depreciated by 5%, and went to the level of approximately 3 thousand points. This is practically testing the pits of the August's sales. On the other hand, the renminbi behaved slightly better. The spread between quotations on the continent (CNY) and in Hong Kong (CNH) clearly tightened. This should theoretically mean that the situation is slowly stabilising.

On the other hand, there was a significant rebound in the interbank overnight rate on the CNH. Between Friday and today, HIBOR increased from 4% to 13.4%. Quoting the analysts' statements the Financial Times informs that “the People's Bank of China (PBOC) was buying the renminbi through the national banks in Hong Kong, in order to withhold the CNH weakness, and decrease the difference between the CNH and CNY. By maintaining the purchase of the CNH, the PBOC decreases a demand for the CNY which is available for finalising the loans on the interbank market”. This probably caused such a sudden increase in cost of interbank loans.

In general, the more problems from Asia, the bigger chances for increases in the EUR/USD which are irrespective of information from other global regions. Reversal of the euro financed carry trade positions, causes appreciation on the European currency. Additionally, considering the commotion on the capital market and the Fed's anxieties from September, the market is beginning to have doubts about the Federal Reserve's decision regarding the pace of hikes in the USA. This on the other hand causes a wear off on the American dollar.

SNB about the franc

In Saturday's interview with the SRF radio Thomas Jordan, chairman of the Swiss National Bank (SNB), said: “the franc is clearly overvalued”, and “we are ready to intervene (in order to wear off the franc – author's footnote) on the currency market”. Such statements from the SNB are not new. However, in context of forthcoming anniversary of releasing the rate of the franc (at a certain point it was stronger by even 40%) these words should stabilise the situation.

The Reuters cites an interview with Jordan for the SFR television. The SNB chairman said that “the American dollar and the Franc being close to parity” is a good sign. This may mean that the situation on the USD/CHF is relatively comfortable for the SNB. However, when it comes for translating these information to the CHF/PLN rate, we can still expect that the zloty will behave to the franc, as it does to the euro. The SNB will probably not want the EUR/CHF to go below the area of 1.0700. This should prevent an intense appreciation of the Swiss currency to the zloty.

Breakdown of rand's rate

Today we had a very interesting situation on the South African rand (ZAR). Right after the opening the USD/ZAR pair increased from the area of 16.30 to approximately 18.00. This overvalue of the South Afircan currency was probably a result of initiating orders on the positions of the Japanese individual investors.

The Bloomberg agency quoted Gareth Berry, strategist from the Macquarie Bank in Singapore. He claims that “the positions on the rand to the yen doubled between June and December, and the South African currency lost at that time 24% of value. Majority of these transactions is set for an appreciation of the rand. It is because the typical style of the investors is to buy the higher rated currency, and wait for the trend to reverse”.

Additionally, the Bloomberg agency data show that at 7.04 of Tokyo time, liquidity on the rand in relation to the dollar disappeared. Later the situation began to stabilise with every hour, because a bigger amount of transactions started being performed during the regular trading. Currently, the rand is by approximately 1.5% below the closing from Friday.

Few words about the foreign market

The market's participants will continue to observe the events from China – condition on the shares market, stabilisation of the renminbi, and liquidity on the interbank market. The dollar should regain strength when the situation stabilises. Today, on the other hand, it is worth noticing the evening testimonies of the Fed representatives. Even though neither Lockhart nor Kaplan do not have the right to vote this year, their comments regarding China and the Fed's monetary policy may appear relatively dovish, and continue to overvalue the American currency.

Zloty remains weak

The zloty remains weak and continues to react nervously on information from China, as well as the behaviour of the stock market indexes from the developed capital markets. A certain concern can be caused for a second month of a decrease in currency reserves in a row – in December it was more than 3 billion USD. As a result, the Polish currency reserves denominated in the American dollars are on the lowest level for almost 5 years, and they are worth 89.4 billion dollars.

It will be worth noting the Wednesday's data about balance of payments in this context, despite the fact that the publications will show the readings for November. Already at that time we could see a decrease in the reserves (by more than 2 billion USD). The upcoming meeting of the Monetary Policy Council will be also worth following (this time exceptionally on Thursday). Perhaps the questions regarding the hypothetical outflow of the capital from Poland will also appear.

However, the global sentiment will be in general the most important for the condition of the PLN. If it does not improve and the Chinese information continue to be negative, the EUR/PLN may relatively quickly break the level of 4.40, and even reach its 4-year maximums. On the other hand, if aversion towards risk decreases, the euro may very quickly cost less than 4.30.

11 Jan 2016 13:43|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

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Afternoon analysis 07.01.2016

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